Mass. regulator fighting clawbacks from investors who bailed on The Reserve Primary Fund

Massachusetts Secretary of the Commonwealth William Galvin’s Division of Securities sent a letter yesterday to Judge Paul Gardephe of the U.S. District Court for the Southern District of New York to oppose any proposals to “claw back” money from investors in The Reserve Primary Fund who withdrew their investment just prior to the fund’s closure.

On Sept. 15, 2008, the day before the closure, there were about 2,009 Massachusetts investors in the fund who had a total aggregate investment of $2.15 billion, according to the letter.

The fund, offered by The Reserve Management Co., was closed after its net asset value fell below $1 due to its holdings in the now-bankrupt Lehman Brothers Holdings Inc.

The Reserve announced the fund’s liquidation plan Dec. 3.

On Aug. 21, the Securities and Exchange Commission filed a revised plan which contains a provision that would give the court-appointed monitor the sole discretion in determining whether a clawback should apply to investors who got their money out in time, according to the letter.

The Massachusetts Division of Securities “opposes the concept of a ‘clawback’ from innocent investors who have redeemed and received their funds out of the Primary Fund on Sept. 15, 2008,” the division attorneys wrote in the letter.

The proposal “risks penalizing the investors who received their wired money on Sept. 15, 2008, totaling $10.7 billion,” according to the letter.

The redemptions were not fraudulent, the division wrote.

“This is not a Ponzi scheme, nor is this a bankruptcy proceeding,” the letter said.